Inflation predicted to rise to 4%

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By Russell Bruce

The Bank of England a few days ago predicted that inflation was expected to rise to 4% by the end of this year, writing in the Bank’s quarterly Monetary Policy Report: “prices rose by 2.5% between June last year, when prices were low because of Covid, and June this year.

This is above the target of 2% and Bank of England modelling indicates this is the start of a trend. Most central banks are also predicting that inflation will fall back later suggesting it is ‘temporary’. This happens when cost increases work their way out of previous annual inflation increases. There are two points to make here, firstly previous year’s inflation rates get baked in for the future pile on and secondly the areas of the economy most affected are often those that impact more on middle and lower income groups.

The Bank of England expects above target inflation rates for the next two years

Essential items like food and power cost increases are more significant for those on average and especially low income households. Most people are seeing the cost of many food items rise and the miles of much tweeted empty supermarket shelves indicate the Brexit mismatch between supply and demand. The Covid pandemic resulted in a lot more DIY activity internationally, resulting in increases in timber and building supplies.

As house builders work to increase housing stock this is likely to continue. Cement, timber, plasterboard and insulation prices are all rising. Global government spend on infrastructure projects in the US, China, Europe and UK will increase demand and therefore base material costs. The positives are employment and productivity gains from better infrastructure resulting in more money circulating in the economy.

This only works when countries can attract the skills and labour these projects require. The UK has a problem here due to aggressive policies to cut immigration and ship and fly out those with valuable and necessary skills needed to counter an ageing population who rely on them, despite opinion in some parts of the UK where this is most misunderstood.

Global prices for iron ore, copper and aluminium are also rising with a further major impact on a vast array of products.

Rising cost of electricity and gas

This is the area that will really hit those on middle and low income. Offgen have capped gas price rises for 15 million households. On 6th August they announced: “The energy price cap will increase from 1 October for the 15 million customers it protects. Those on default tariffs paying by direct debit will see an increase of £139 from £1,138 to £1277. Prepayment customers will see an increase of £153 from £1,156 to £1309.”

Electricity prices last increased back in March. ITV covered the increase of 6.9% from SSE, the last of the big six. ITV reported; “Eon, ScottishPower, Npower and EDF have all ramped up prices over the past months, hammering households already struggling with rising inflation linked to the Brexit-battered pound.” The next cap round Offgen will consider is also scheduled for October, just as the nights are getting ever shorter and winter beckoning.

Fuel poverty

How fuel poverty is calculated is a devolved area and methodology varies across the UK’s four nations. It relates to those who have to spend an unduly high proportion of their income on keeping their homes reasonably warm.

A House of Commons research briefing, Fuel Poverty noted; “Fuel poverty rates vary across the nations of the UK and cannot be directly compared due to differences in methodology. In the latest estimates, around 13% of households in England were classed as fuel poor, 25% in Scotland, 12% in Wales, and 18% in Northern Ireland.” The figures for England and Wales look rather low and this winter is likely to see a rise in real terms, if not in methodology.

Making matter worse is the end of the temporary £20 uplift in Universal Credit claimed by many working families on low incomes. The poor have no champions in Johnson’s Tory Brexit government. From recent and repeated indications it is clear Rishi Sunak’s instincts are to impose a further round of austerity to protect the wealthy from tax increases. Johnson’s recent outburst over Sunak’s proposal to open up international travel even further, gave rise to a reported threat to demote Sunak to Health. Demotion might be a good idea but he would wreak havoc on the NHS and begin privatisation on his first day.

Conclusion

Higher inflation over the next two years is a process underway. It may work itself out later as the Bank of England currently predict but the legacy is a high impact on lower income groups. A civilized society is one where everyone has access to education and health care and income to provide enough food, warmth and energy at affordable prices. The economy will be the better of such policies as spend from decent income circulates through the economy and generates increased tax revenues from direct and indirect taxes. The wealthy find new ways of making more money out of inflation and offshore the new revenue stream.